Apr
06
2023

What Is a Debit Card?

By | Budgeting & Goals, money | Comments Off on What Is a Debit Card?

A debit combines some of the features of an ATM card and a credit card to give you an easy way to access cash and pay for purchases. For many people, tapping, swiping, or entering their digits online has become a favorite way to conduct everyday financial transactions.

Debit cards resemble credit cards, but they don’t involve a line of credit or accruing interest charges; the money spent is deducted directly from your checking account. This (and other features) can be a benefit or a downside, depending on your particular situation.

Here, learn more about the ins and outs of debit cards and how to use them most efficiently, including:

•   What is a debit card?

•   How do debit cards work?

•   Where can you use a debit card?

•   What are the differences between a debit card vs. an ATM card?

•   What are the differences between a debit card vs. a credit card?

Debit Cards Defined

A debit card is a payment card that allows you to spend money without carrying cash.

When you use a debit card, the funds are your own, so there’s nothing to pay back later.

Most debit cards look just like credit cards. They typically feature an account number on the front, along with the cardholder’s name and the expiration date.

There will likely also be a smart chip on the front, along with a logo in the lower right-hand corner that tells you which payment network the card is connected to (such as Visa, Mastercard, or Discover). On the back you’ll likely see a place to sign, as well as a three-digit security code (CCV).

But there are some major differences between debit cards and credit cards.

When someone uses a credit card the money is borrowed. Credit card holders receive a bill every month for what they owe, and the balance must be paid in full or they can be charged interest.

When you use a debit card to get cash or make a purchase, the money comes directly from an account you have with a bank or some other type of financial institution. The funds are your own, so there’s nothing to pay back later.

How a Debit Card Works

Now that you know what a debit card is, here’s how a debit card typically works:

•   You tap, swipe, or insert the card at a terminal and enter your PIN (personal identification number) in many cases. The PIN adds a level of security to the transaction.

•   The information is communication (the amount of your purchase) and your bank verifies that the funds are available in your checking account. The transaction is approved in that case, or it will be denied if you don’t have enough funds available.

•   In a similar way, a debit card can allow you to deduct funds from an ATM.

Worth noting: Debit cards may have spending limits capping the amount you can use in a single day, even if you have more than that amount on deposit. Check with your financial institution to learn what may apply.

Features of a Debit Card

Debit cards have many features that make them an asset to managing your financial life:

•   Safer than carrying cash

•   More convenient that using checks, plus no fee for ordering checks

•   Quick and easy way to make purchases or access cash

•   Accepted for purchases by many vendors

•   Does not charge interest since it draws directly from your checking account

•   Typically don’t charge fees

•   May offer cash back rewards

•   May have daily spending limits

How Do You Get a Debit Card?

If you don’t already have one, you may wonder how people get debit cards. These are the steps to getting a debit card:

1.    Open a checking account: Checking accounts (whether at a bank, credit union, or online financial institution) typically come with a free debit card that can be used to get cash at ATMs or to make purchases.

A brick and mortar bank may be able to issue customers a new debit card right away. With an online institution, it might take a few days for the card to come by mail. Card holders also receive a personal identification number (PIN), which is a security code they’ll use with their account.

2.    Activate the card: Typically, you can activate a new debit card at the financial institution’s website, at one of its ATMs, or by calling a designated phone number and answering or keying in some basic identifying information.

3.    Start using your card. You should be ready to start tapping, swiping and entering your card’s digits online to make purchases.

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Where Can You Use a Debit Card?

A debit card can be used to make withdrawals at an ATM, to make in-person or online purchases, and to make automatic payments for recurring bills.

Each type of transaction works a bit differently. Here are tips for using your debit card.

At the ATM

One of the great conveniences a debit card has to offer is that it can be used to get cash (or make a deposit, transfer funds, or just view your account balance) just about anywhere there’s an ATM.

You just push your debit card into the slot, and enter your PIN to get access to your account. Once you finish and retrieve your receipt and debit card, it’s a good idea to double check that the machine has returned to its welcome screen before turning it over to the next user.

If you use an ATM that’s not in your bank’s network, you could end up paying a non-network fee to your bank and an ATM surcharge to the ATM’s owner. If you’re overseas, you might also be charged a foreign transaction fee.

If you’re a big-time ATM user, you might be able to avoid those fees by scouting out in-network ATM locations in your area or where you are going to be traveling ahead of time. Or you might open an account at a financial institution that doesn’t charge fees and/or reimburses certain fees.

Quick Money Tip: Fees can be a real drag when you’re trying to save money. SoFi’s high-yield checking account has no account fees, including overdraft coverage up to $50.

In-Person Purchases

The process for using a debit card to purchase goods or services can be a little different from one merchant to the next.

Typically a customer will be asked to swipe, insert, or tap their debit card themselves at a card reader on the counter, then may be prompted to authorize the purchase, either by entering their PIN or by signing as they would with a credit card.

Either way, the money to pay for the purchase comes out of the card holder’s account, though the transactions are processed somewhat differently.

The transaction method also may affect any points or other rewards a card holder is hoping to earn on a purchase. Some programs reward PIN purchases only, some reward signature purchases only, and some reward both.

A retailer also may allow customers making a PIN transaction to ask for cash back on top of the total amount of their purchase, so they don’t have to make a separate trip to an ATM. However, you may be charged a small fee for this convenience.

Online Purchases

Can you use a debit card online? Usually, yes, even if you do not see “debit card” listed as a payment method when you want to buy something online. But if there’s a credit network logo on the front of your debit card, you should be able to use your card for the transaction.

When a merchant’s website asks for a payment method, debit card users can choose “credit card,” then enter their debit card account number, expiration date, and three-digit security code (CCV) to have the purchase processed as a signature transaction. (A PIN transaction won’t be a payment option online.)

Automatic Payments

A debit card also can be used to make automatic payments on monthly bills, such as student loans, car loans, subscriptions and memberships, and utility bills.

To set up automatic debit payments, the card holder provides the company with a debit card account number, expiration date, and CCV, and authorizes future electronic withdrawals. The payment can be the same amount every month, or, if the amount is likely to vary a bit from month to month (as utility bills generally do), the card holder can specify a range.

With automatic debit payments, card holders give businesses permission to take payments from their account, which is different from arranging with the bank to make authorized recurring payments. In both cases, however, it can be important to track those payments and be sure the transactions are accurate.

Is There a Difference Between a Debit Card and an ATM Card?

There are differences between a debit card and an ATM card to note:

•   A debit card can be used to make withdrawals at an ATM, but it also can be used to make purchases and to pay bills.

•   An ATM card can be used only to get funds from a checking or savings account at an ATM machine.

Is it Better to Use a Credit Card or Debit Card?

As with most financial tools, it’s up to each individual to decide what works best for them. Here are some ways to evaluate the pros and cons of using a debit card vs. a credit card.

Budgeting

Using a debit card for a majority of transactions may make it easier to stick to your budget, because you can spend only what you have in your account. You aren’t borrowing money as you would with a credit card, so you may find yourself paying more attention to every purchase and whether you can really afford it.

With a credit card, it can be tempting to pay now and worry about the bill later. If you’re super disciplined about paying off your entire credit card balance every month, that might work for you.

But if, like many Americans, you’re likely to carry forward a balance on your credit card (or cards) every month, the debt could eventually grow out of control with interest.

Convenience

Both debit and credit cards are easy to use, but there are a few ways in which debit cards may have an edge when it comes to convenience.

•   It’s easier and cheaper to get quick cash with a debit card. You can get a cash advance with a credit card, but you may have to pay a hefty fee and a higher interest rate on the advance. And with a cash advance you could be charged interest starting on the day you receive the money — there’s no grace period as there is when you make a purchase with a credit card.

•   You may be able to get a physical cash advance when making a purchase. That benefit usually isn’t available with a credit card.

•   It’s generally easier to get a debit card than a credit card. Most financial institutions will automatically give customers a debit card when they open an account. Getting a credit card can be harder, especially if you’re under 18, don’t have any verifiable income, have a poor (or no) history with credit, or lack the typically required identification documents. The requirements are tougher for credit cards because lenders want to be sure their borrowers are capable of repaying their debts.

Penalty Fees

No matter what kind of card you use — debit or credit — you could face a penalty fee if you spend more money than you currently have available.

With a debit card, you may incur an overdraft fee if you spend more than you have in your account (when making a signature purchase, for example, or when using autopay).

With a credit card, you could face an over-limit fee (if you push your balance over your credit limit), a late-payment fee if you fail to make your minimum monthly payment, or a returned payment fee if for some reason your payment isn’t accepted.)

Rewards

Credit cards can be more likely to offer extra perks than debit cards, such as cash-back rewards or points that can be used for travel, though some debits do offer points and rewards.

Spending Limits

One of the things that can make a debit card really useful is that it’s difficult to spend more than you have. But that also can be a drawback if you need to make an expensive purchase. Even if you have a hefty amount of money in your account, you may encounter a daily spending limit when using a debit card.

Those daily limits are meant to protect account holders by limiting the amount fraudsters could spend with a stolen debit card. But if you aren’t aware you have a limit or don’t know what the limit is, you could get an unpleasant surprise when making a major purchase. Don’t know what a debit card’s limit is? Ask your bank.

If you find out you have a debit limit and feel it’s too low, you may be able to request an increase.

Of course, credit cards have spending limits, too, in the form of available credit. Those who go over their credit limit could have their card declined or they might have to pay a fee. Credit card users can check their monthly statement online or in person, or call customer service to see where they stand.

Building Credit

This may seem like a bit of irony, but even though consumers may be trying to be financially responsible by using a debit card whenever they can, they won’t be directly helping their credit score.

Lenders often use credit scores to determine if a person qualifies for a loan or credit card, or a better interest rate when borrowing money. It reflects an individual’s past credit history and shows how well they’ve handled credit in the past.

When someone uses a debit card to pay for goods and services, the money is coming from their own account, so it doesn’t impact their borrowing record. If you use a debit card to stay out of debt and to make car or student loan payments on time, though, it might indirectly help your credit standing.

Safety

A debit card is linked to your bank account, so if a thief gets hold of your physical card or just your card number, any money they take is yours — not the bank’s, as would be the case with a stolen credit card.

And that could cause a lot of problems if you don’t notice and report the problem swiftly, according to the Federal Trade Commission (FTC) .

Debit card use is protected by the Electronic Fund Transfer Act (EFTA), which gives consumers the right to challenge fraudulent charges. But card holders have to act with some speed to get full federal protection.

And those protections aren’t quite as substantial as the federal law that covers credit card theft, the Fair Credit Billing Act (FCBA).

If your debit card is lost or stolen, you could have zero liability if you report it before any unauthorized charges occurred. If you report a lost or stolen card within two business days, your loss may be limited to $50. But if you wait more than 60 calendar days after you receive your statement to make a report, you could lose all the money a thief drains from any account linked to your debit card.

That may sound scary, but if your debit card is backed by a credit card network (like Visa or Mastercard), you likely have the same “zero liability” protections credit card users have.

Debit Card Alternatives

If you don’t have a debit card or prefer not a use one, here are some options:

•   Cash. It’s still a form of payment that’s accepted at many retail locations.

•   A check. For paying bills or making purchases (typically from smaller vendors), you may be able to write a check.

•   Prepaid cards (also called prepaid debit cards in some cases). Available at various retail stores, these cards hold the amount of cash you put on them. Some are meant for one-time use; others can be reloaded with additional funds through an app, direct deposit, money transfer, or with cash at a store that offers this service.

Prepaid cards usually work at any ATM or retail location that accepts the card’s payment network. However, there are pros and cons of prepaid debit cards. They tend to come with more fees and fewer protections than traditional debit cards.

Banking With SoFi

Debit cards are typically offered along with a checking account. You can use a debit card to quickly get cash, either from an ATM or by using the cash back function offered by many merchants. You can also use your debit card to purchase goods and services, and even use it for autopay. Because you are using the cash you have on deposit, you don’t accrue any interest fees, but you are likely not establishing your credit either. These cards can be a convenient aspect of your daily financial life.

Looking for a debit card that provides perks and protections but frowns on account fees? SoFi Checking and Savings may be the right choice for you. Open an account and receive a World Debit Mastercard®, which offers contactless payment, purchase protection, and a cash back rewards program. And, withdrawing cash is fee-free at 55,000+ Allpoint Network ATMs worldwide.

SoFi: Helping you spend smarter.

FAQ

Are there debit card fees?

Typically, debit card use does not incur fees. However, if you use it at a non-network ATM to withdraw cash, you could be hit with a fee. Also, if you overdraft your account when swiping, that could incur charges. Lastly, the checking account that it’s connected to may or may not be fee-free.

What do the numbers on a debit card mean?

The numbers on a debit card are similar to the numbers on a credit card: They identify the industry issuers involved and uniquely capture your account number.

Are debit cards safe?

Debit cards are typically safe, but they can be stolen or lost, which could allow someone to make unauthorized transactions. Plus, the hackers of the world are usually at work, trying to steal people’s information. That said, using a PIN helps protect transactions, and if you report the loss or theft of your debit card within two business days, your liability should be capped at $50. Some cards offer zero-liability protection.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Apr
06
2023
Beautiful Master Bathroom Remodel Ideas

Beautiful Master Bathroom Remodel Ideas

By | Home Ownership, mortgage | Comments Off on Beautiful Master Bathroom Remodel Ideas

Remodeling a master bathroom can provide a spa like sanctuary while adding value to your home. With some design upgrades — countertops, tile, fixtures, cabinetry, and bathtub — you can create a new look that really makes a splash.

The vast array of materials, colors, and design choices can be overwhelming. To help get you started, read on for 20 master bathroom remodel ideas.

How the Master Bathroom Has Changed Over Time

In the 1960s and 1970s, people started migrating from the cities to suburbia. More space meant more square footage. Initially, a master bath meant a bigger bathroom with a double sink.

In the 1980s, opulence was king. Master bathrooms meant sunken jetted tubs, lavish fixtures, and expansive countertops for perfume bottles and dressing vanities.

Today, some real estate agents and developers use the term “primary” bathroom or bedroom vs. “master” (even though the National Association of Realtors® has noted that a HUD opinion said “master” in this context is not related to race or gender and therefore does not violate fair housing laws).

While primary bathrooms are still spacious, style trends have taken a more subtle turn toward organic materials and earthier tones.

Regardless of trends, the master bathroom is here to stay, and is considered a must-have for many first-time homebuyers and experienced buyers.

What Is the Average Size of a Master Bathroom?

A master bathroom is defined as the largest bathroom in the house, and is almost always connected to the primary bedroom. A suburban master bath averages 100 square feet but may range from 75 to 210 square feet.

A master bathroom typically features:

•   A double sink

•   A large shower

•   A toilet

A bathtub is not a requisite, but these days most homebuyers want a tub in the master bathroom, especially if there is not another one in the house.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

10 Standard Master Bathroom Remodel Ideas

An average-size master bathroom renovation may cost $10,000 to $30,000, depending on material types, labor costs (do you need to find a contractor?), and the scope of the project.

Here are 10 remodeling ideas for a standard master bath that can offer panache for your cash.

1. Refresh Your Countertops

Replacing worn-out countertops in a master bath can transform the feel of the space. Granite, marble, and quartz counters add a sense of contemporary elegance but cost more than laminate.

Granite can cost $40 to $200 per square foot; marble, $75 to $250; and quartz, $55 to $155. Laminate costs around $15 to $40 per square foot. That’s just the materials.

2. Go for the Hip, Hip Bidet

While common in Europe and Japan, bidets are finally gaining popularity in the United States. Because bidets limit the use of toilet paper, they are considered good for the environment and better for your skin.

A stand-alone bidet with installation can run between $500 and $1,500. An all-in-one bidet toilet can cost anywhere from $1,200 to $2,500.

3. Install a Walk-in Shower

Walk-in showers are usually partially enclosed with glass — devoid of doors, tubs, and shower curtains. The lack of barriers creates an open, contemporary look, almost like bathing in an outdoor shower.

Beyond being stylish, walk-in showers are accessible. With no steps or ledges to trip over, this type of shower remodel will age well with you and your home.

4. Consider Shower Speakers

As long as you’re redoing the shower, you might as well add some in-ceiling shower speakers. These advanced sound systems offer hands-free use, connecting to voice assistants like Siri or Alexa. Singing in the shower never sounded so good!

5. Install a Fan Timer Switch

A long, hot shower can generate a lot of steam. A smart-fan timer will sense the amount of steam and moisture in the air, turning on and staying on long after you’ve toweled off. This can prevent water damage, excess moisture, and potential mold.

6. Upgrade Outdated Fixtures

Switching out your old faucets, knobs, and light fixtures is a quick and cost-efficient way to spiff up your master bathroom.

7. Tile an Accent Wall

Retiling the entire master bathroom can take a big bite out of your wallet. Some homeowners are choosing to tile a single wall or focal area. You can energize the space by contrasting white subway tiles with a colorful wall of hexagonal tiles.

8. Elevate Your Look With Floating Shelves

Even a master bathroom can use more storage. Floating shelves on the walls can help achieve a sleek, minimalist look and cost less than installing cabinets.

If the bathroom has a closet or you’d like to add one, a closet remodel might be in order.

9. Keep Things Cozy With Heated Floors & Towel Racks

If you’re renovating your master bathroom floors, perhaps you could put in an electric or water-based heating system. This will ensure toasty toes without clunky radiators or exposed pipes.

Heated towel racks provide warmth in the winter and a quick-drying option for summer beach towels, all for about the same electric costs as flipping on a light switch.

10. Outlets in the Vanity Drawers

A master bath typically has a lot of vanity drawers. Installing outlets inside the drawers will help keep hair dryers, electric razors, and other appliances from cluttering your countertop.

10 Small Master Bathroom Remodel Ideas

Not every master bathroom has enough space for a Jacuzzi tub. Here are some remodeling ideas for a small master bath.

1. Install a Pocket Door

Doors that open on hinges can take up a lot of space. A sliding pocket door to the bathroom can make the master bath feel much roomier.

2. Add a Skylight

Adding a skylight in the master bathroom can flood the space with natural light, making it feel more airy and spacious. So can recessed lighting.

3. Choose a Long Sink

Instead of the standard double sink, consider a long, troughlike sink for a master bathroom vanity. It can provide a chic, modern look, and the elongated sink creates the illusion of more space.

4. Mount an Elongated Mirror

As with a long sink, stretching a mirror across a whole wall, instead of just over the vanity, can add depth and extra reflective light.

5. Opt for a Floating Vanity

A floating vanity is a cool design choice for a smaller master bath. It can add openness and more space underneath the sink for storage.

6. Add Lights Under the Cabinets

Cabinets, vanities, and shelves can cast a shadow on the floor, darkening a master bathroom and making it feel smaller. Installing lights underneath countertops and storage units can cast a downward light to add dimension.

7. Stretch the Floor Tiles Into the Shower Stall

If you have a walk-in shower, consider extending the floor tiles into the shower stall floor. The continuity of design will give the illusion of a longer space.

8. Add Storage

Select bathroom pieces with a dual purpose: mirrors with built-in shelves, a vanity with multiple drawers. Containing your clutter will make the master bath seem bigger and is one of the ways to refresh your home.

9. Consider a Freestanding Bathtub

Although a stand-alone tub can need more room for its fixtures, a clawfoot or modern oval bathtub can make a small master bathroom feel grand.

10. Stick to Light Colors

Soft whites, blues, and greens reflect natural light from windows and skylights, making the master bath seem more spacious. Choose light vs. dark colors for wall paint, shower curtains, and countertops.

Ways to Finance a Master Bathroom Remodel

A master bathroom renovation can add up. Here are several ways to finance the project.

HELOC

If you own your home and have sufficient equity, you may be able to open a home equity line of credit (HELOC), using your home as collateral. You’ll only make payments on the amount you borrow, the limit may be higher than a personal loan, and a HELOC usually has a lower interest rate than a credit card or personal loan.

But the rate is usually variable and can increase, and you could face closing costs and a minimum-withdrawal requirement. If you default on a HELOC, you risk losing your house.

Still, HELOCs tend to be hot when interest rates are rising.

Cash-Out Refinance

If you have sufficient home equity, you can apply for a cash-out refinance. You would refinance your home mortgage loan for more than you owe, take out part of the cash difference, and use the lump sum to build your new master bathroom.

Expect mortgage refinancing costs of 2% to 5% of the loan amount.

Personal Loan

With a personal loan for home improvements, you can receive a lump sum and repay it with interest in monthly installments. These loans typically offer same-day funding with no collateral required. The rate is based on the loan term, the amount of credit requested, and your credit score.

Credit Card

If you have a 0% interest period on a credit card, it could be a smart way to pay for your master bath reno. But unless you pay attention to the end of that introductory period, you could end up buried in interest charges. A missed payment will hurt your credit scores, and most of the time a late payment will stay on a credit report for seven years.

The Takeaway

Remodeling a master bathroom will add value to your home and create a retreat where you can invest in some serious self-care. The cost to remodel a primary bathroom has a wide range.

How to renovate so you can luxuriate? SoFi offers a personal loan of $5,000 to $100,000 with no fees, as well as a cash-out refinance.

SoFi also brokers a HELOC that allows access to up to 95%, or $500,000, of your home equity to finance your master bathroom redo and any other upgrades.

Apply for a HELOC to turn your home renovation dreams into reality.

FAQ

Does remodeling a bathroom increase home value?

Yes. One study showed that the average full bathroom remodel cost about $26,500, and homeowners could expect a return on investment upon resale of about 60%.

What is the biggest expense in a bathroom remodel?

Labor in general. Plumbing and tile work in particular. Want to move the toilet? That’s a complicated task.

What is trending in bathrooms?

Steam showers, towel and floor heaters, and spa-inspired decor. Vintage-inspired sinks, mirrors, light fixtures, and clawfoot tubs. Wet rooms, where the shower, tub, sink, and toilet are all in the same room at the same level. Earth tones and jewel tones. Smart devices.

What should you not do when remodeling a bathroom?

A downward-facing light centered over the mirror can cast a shadow. Other mistakes: not adding enough storage, buying fixtures made with plastic parts instead of metal, installing a hook out of reach from the shower, and not adding a hand shower, which will mean a tougher task cleaning the shower walls.

Photo credit: iStock/stocknroll

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Investing as a HENRY (High Earner, Not Rich Yet)

By | Growing Wealth, invest, Investing | Comments Off on Investing as a HENRY (High Earner, Not Rich Yet)

Coined in 2003, the term HENRY, or “High Earner Not Yet Rich,” refers to people who make an above-average salary but still don’t manage to accumulate much wealth. The term is said to apply to one of two groups of people: 1) millennials who make between $100,000 and $200,000 per year, or 2) families that make roughly $250,000 to $500,000 per year.

But no matter their personal situations, HENRYs share something: namely, they make high incomes but aren’t saving a sizable chunk of their earnings. Despite taking home higher-than-average salaries, HENRYs’ expenditures leave little money left each month for either savings or income-producing investments.

Because of this, HENRYs are sometimes referred to as the “working rich.” If they were to stop working, they wouldn’t continue to be high earners since they make money mainly from their jobs. This is in contrast to ultra-high net worth individuals, who frequently own significant income-producing assets (like real estate holdings, revenue-creating businesses, or dividend-yielding stocks).

There are a few ways that HENRYs could potentially pull themselves out of their situation, though. Here’s a look at how.

Relocating to a More Affordable Area

One important factor for HENRYs to consider is location. Where an investor lives can make a huge difference in their ability to accumulate wealth. The cost of living can vary dramatically from region to region — as can state taxes.

The state of California, for example, has a state income tax rate of up to 13.30%. Meanwhile, Utah has a flat income tax rate of 4.85%, while Texas residents pay zero state income tax.

Living costs can have an even bigger impact on expenses than taxes. The median price of a home in Hawaii is $829,000. In West Virginia, it’s only $289,400 .

According to data published by Equifax, HENRYs tend to live in metro areas with higher costs of living, which may make growing assets harder. Choosing to relocate to a more affordable area might be an appealing option for those who can work remotely or transfer locations at their current jobs. Savings from a reduced cost of living could add up significantly over time.

It is worth noting that the average annual salary in more affordable areas is often lower as well, so HENRYs may want to investigate whether their jobs can be done remotely or if their skills are in high demand in other towns, cities, and states.

While moving may not be easy or simple, it could be one way for a high earner not rich yet to cut income-consuming costs and begin setting aside more money for wealth-aimed investments or savings.

Examining Tax Deductions

On top of local living expenses, another expense burden that tends to weigh heavily on many individuals, especially HENRYs, is taxes. Employees who earn higher salaries tend to pay more in income taxes. This is especially true in states that have state tax brackets that tax individuals at higher rates if they earn more money, as opposed to states with flat tax rates.

One common way to reduce income tax burdens is by contributing to a traditional individual retirement account, such as a 401(k) or IRA. (Contributions to Roth IRAs aren’t deductible). Some HENRYs might already have a retirement account through their employers. In that case, they may opt to make the maximum contribution, especially if their employer will match it.

Certain amounts of donations to qualifying charitable organizations can also be tax-deductible. Of course, if a high earner not rich yet has little disposable income left at the end of each month, sizable cash or non-cash property donations might not be a viable option for some.

For HENRYs who own a home, energy-efficiency tax benefits could be something to look into as well. Installing solar panels and solar-powered water heaters are among the most common items that can qualify for this kind of tax deduction. Others that are less common include geothermal heat pumps, renewable-energy fuel cells, and wind turbines. Energy-efficiency tax deductions can apply to a primary residence. And, where applicable, they can be claimed on other properties an individual might own.

HENRYs who have children and live in a state that allows it might be able to deduct 529 savings plan (aka a college fund) contributions from their state income taxes. Opening a 529 plan can address both how to pay for a child’s college expenses and, potentially, reduce state income tax liability.

A high earner not rich yet with no children could still open a 529 plan for friends, nieces, nephews, or even for themselves if they plan on going to college in the future. While 529 contributions aren’t tax-deductible on the federal level, the funds can grow tax-free. Plus, many states allow for the deduction of funds deposited into these accounts from state income taxes.

Paying Down Debt

It’s common for HENRYs to carry heavy debt burdens. Most often, this comes from student loans, a mortgage, auto loans, and credit card debt.

One reliable way to pay down debt is to make higher-than-minimum payments on debts carrying the highest interest rates. In this way, individuals can pay less in interest than if the higher rate debts were to continue compounding. Credit cards typically have the highest interest rates of any debt that most people carry (payday loans and some other types of unconventional loans might have higher rates still, but let’s assume HENRYs aren’t relying on these services).

For many borrowers, student loan debts can quickly become a problem. Interest rates on student loans can vary — especially if borrowers have a mix of federal and private student loans. And, when large enough payments aren’t made toward the principal or on already capitalized student loan interest, borrowers might get stuck with a lot of their monthly payments going toward accruing interest. In turn, this may make it difficult to quickly pay off outstanding educational debts.

Becoming as debt-free as possible can help individuals not relinquish income to interest payments.

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Diversifying Investments for the Future

Once the above items are taken care of, HENRYs could invest the extra income saved in ways that will help their money grow. Even investors in their 20s may want to research ways to start investing. Here’s a look at the types of investments HENRYs might consider.

Income-Producing Assets

Wealth, understood as an expanding total net worth, is the kind of thing HENRYs are aiming for but never seem to achieve — despite their high-earner incomes. Breaking this cycle could involve first cutting certain expenditures (i.e., cost of living or high-interest debt).

Then, individuals may opt to take some of their newly freed-up funds and invest in income-producing assets. Income-producing assets may span securities that bear interest or dividends — bonds, real estate investment trusts (REITs), and dividend-yielding stocks.

Recommended: Income vs. Net Worth: Main Differences

Dividend Reinvestment Programs (DRIPs)

HENRYs can take advantage of the power of compounding interest by utilizing what’s known as a dividend reinvestment program (DRIP). Enrolling eligible securities into a DRIP means that any dividends paid out will automatically be used to purchase shares of the same security.

With the DRIP approach to investing, the next dividend payment will be larger than the last. This is due to the fact that more shares will be held, and payments are made to shareholders in proportion to how many shares they own.

Exchange-Traded Funds

Given that some HENRYs might not have a lot of non-work time to actively manage their investments, passive investment vehicles like exchange-traded funds (ETFs) might be an additional investment option.

Many ETFs yield dividends, although those dividends tend to be somewhat smaller than those offered to individual shareholders of company stocks.

Real Estate

HENRYs often own their own home. As such, mortgage payments combined with interest can make up a substantial portion of their regular monthly expenses.

While some people opt to buy a home as an investment, hoping that the property will grow in value over the years, buying real-estate does not always guarantee a profitable return. Someone seeking to shirk their HENRY status could decide to switch or downsize to a less expensive apartment or home — assuming the cost of rent or a new mortgage is less than their current house payments. In some areas, rentals can be quite pricey, so it’s worth doing your homework to compare the pros and cons of renting vs. buying where you live.

When individuals can cut back on monthly housing expenses, it may then be possible to invest some of their freed-up income into additional assets. If an investor still wants to have exposure to property, they could choose to invest in REITs, which are known for having some of the highest dividend yields in the market.

Since REITs are required by law to pay a certain percentage of their income to investors in the form of dividends, it’s not surprising that they’re a favorite among investors seeking potential earnings. Naturally, as with any real estate investment, fluctuations in interest rates and demand may impact an REIT’s market performance.

Investing Now for the Future

When it comes time to start investing, there’s no need to wait until retirement is nigh. After all, the longer certain securities are owned, the more time they could potentially accrue value or that dividends could be paid out.

SoFi Invest® offers individuals the tools they need to start investing online, whether they’re a new investor, HENRY or experienced market watcher. Plus, with SoFi Invest, members can access complimentary financial planners, who can discuss the investor’s financial goals and help them map out various paths to a financial future.

Take a step toward reaching your financial goals with SoFi Invest.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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Pros & Cons of the 60/40 Portfolio

By | Growing Wealth, invest, Investing | Comments Off on Pros & Cons of the 60/40 Portfolio

There are many different strategies when it comes to building an investment portfolio, but each involves investing in a certain percentage of various assets, and some also involve buying and selling assets at particular times. One of the most popular strategies recommended by financial advisors is called the 60/40 portfolio, which involves building a portfolio that contains 60% equities (stocks) and 40% bonds.

Like any investment strategy, this simple long-term approach has both upsides and downsides. Let’s look into the details of the 60/40 portfolio, its pros and cons, and who it’s best suited for.

What Is the 60/40 Portfolio?

An investment portfolio divided as 60% stocks and 40% bonds is commonly understood as a “60/40 portfolio.”

The 60/40 portfolio is designed to withstand volatility and grow over the long-term. The strategy is that when the economy is strong, stocks perform well, and when it’s weak, bonds perform well. By holding more stocks than bonds, investors can take advantage of growth over time. Meanwhile, the bonds mitigate the risk of losing a huge amount during downturns.

60/40 Portfolio Historical Returns

Over the past century, the 60/40 portfolio was very popular because of its reliable returns. Although it hasn’t always performed as well as an equity-only portfolio, it carries less risk and is less volatile. However, historical returns aren’t necessarily an indicator of how the 60/40 portfolio will perform in the future.

Since 1928, a 60/40 portfolio containing 10-year U.S. Treasuries and the S&P 500 has had an average annual return of 9%. With inflation factored in, that return decreases to 5.9%.

The 60/40 portfolio grew 7000% since the 1970s, with only a 30% maximum decline. Unfortunately, returns on the 60/40 portfolio are predicted to be lower in the coming decades than they’ve been in the past. This is due to a few factors:

•   Inflation: As inflation increases, purchasing power decreases. Currently, a lot of bond yields aren’t even keeping up with the rate of inflation, and this may continue for a long time.

•   Real GDP growth: Real GDP is the amount of national economic growth minus inflation. As the economy has matured in recent years, the GDP has been growing more slowly than in decades prior.

•   Dividend yields: The amount that companies pay out through dividends is typically much lower now than it used to be.

•   Valuation: Companies are valued much higher than they used to be, and large companies are growing more slowly. As such, investors can expect slower growth in stock earnings.

How to Build a 60/40 Portfolio

The simplest way to build a portfolio with 60% equities and 40% bonds would be to purchase the S&P 500 and U.S. Treasury Bonds. This portfolio would include mostly U.S. investments, though some investors might choose to diversify into international investments by purchasing foreign stocks and bonds.

Financial advisors putting together a 60/40 portfolio for investors generally include high-grade corporate bonds and U.S.government bonds, along with index funds, mutual funds, and blue-chip stocks. This combination avoids taking on too much risk — which is a possibility when purchasing an unknown stock and it fails — and typically yields steady growth over time.

Investors may also choose to invest in exchange-traded funds (ETFs), which are mutual funds that are traded on an open market exchange (like the New York Stock Exchange), just like stocks. By investing in funds, investors increase their exposure to different companies and industries, thereby diversifying their portfolio. There are many types of ETFs. Some of them are groups of stocks within a particular industry, while others are grouped by company size or other factors.

If an investor were looking to generate income from their investments, they might choose to buy dividend-paying stocks and real estate investment trusts (REITs).

In terms of bonds, there are also a number of options. Investors might choose to buy municipal bonds, which earn tax-free interest, or high-yield bonds, which earn more than other bonds but come with increased risk.

It’s recommended that investors rebalance their portfolio annually to ensure the percentages remain on track.

Pros of the 60/40 Portfolio

The 60/40 portfolio is a simple strategy that has several upsides:

•   It can be very simple to set up, especially by purchasing the S&P 500 and U.S. Treasury Bonds.

•   It’s a “set it and forget it” investment strategy, needing only yearly rebalancing.

•   Holding bonds helps balance the risk of equity investments.

•   It typically offers steady growth over time.

Cons of the 60/40 Portfolio

Of course, as with any investing strategy, the 60/40 portfolio strategy comes with some downsides. While the 60/40 portfolio used to be the standard choice for retirement, people are now living longer and need a portfolio that will continue growing steadily and quickly to keep up with inflation. Here are some other factors to consider:

•   If investors buy individual stocks, they can be volatile.

•   Mutual funds and ETFs can have high fees.

•   Bonds tend to have low yields.

•   The strategy doesn’t take into account personal investment goals and factors, such as age, income, and spending habits.

•   Diversification is limited, as investors can also add alternative investments, such as real estate, to their portfolio.

•   There is the potential for both stocks and bonds to decline at the same time.

•   Over time, a 60/40 portfolio won’t grow as much as a portfolio with 100% equities. This is especially true over the long-term because of compounding interest earned with equities.

Who Might Use the 60/40 Portfolio Strategy?

Some investors can’t sleep if they’re afraid their stock portfolio is going to crater overnight. Using the 60/40 strategy can take some of that anxiety away.

The 60/40 strategy is also a viable choice for investors who don’t want to make a lot of decisions and just want simple rules to guide their investing. Beginner investors might decide to start out with a 60/40 portfolio and then shift their allocations as they learn more.

Additionally, those who are closer to retirement age may choose to shift from a stock-heavy portfolio to a 60/40 portfolio. This could help to reduce risk and ensure they have enough savings to fund their retirement.

Investors who have a high risk tolerance and are looking for a long-term growth strategy might not gravitate toward a 60/40 plan. Instead, they may choose to allocate a higher percentage of their portfolio to stocks.

Alternatives to the 60/40 Portfolio

In recent years, some major financial institutions have declared that the 60/40 portfolio is dead. They’ve instead been recommending that investors shift more toward equities, since bonds have not been returning significant yields and don’t provide enough diversification. Some suggest holding established stocks that pay dividends rather than bonds in order to get a balance of growth and stability. However, these recommendations are partly based on the fact that the current bull market is over, and they aren’t necessarily looking at the long-term market.

There are many other investment strategies to choose from, or investors might create their own rules for portfolio building. Here are a few common strategies to consider.

Permanent Portfolio

This portfolio allocates 25% each to stocks, bonds, gold, and cash.

The Rule of 110

This strategy uses an investor’s age to calculate their asset allocation. Investors subtract their age from 110 to determine their stock allocation. For example, a 40-year-old would put 70% into stocks and 30% into bonds.

Dollar-Cost Averaging

Using this strategy, investors put the same amount of money into any particular asset at different points over time. This way, sometimes they will buy high and other times they’ll buy low. Over time, the amount they spent on the asset averages out.

Alternative Investments

Investors may consider allocating a portion of their funds to alternative investments, such as gold, real estate, or cryptocurrencies. These investments may help increase portfolio diversification and could generate significant returns (although the risk of loss can also be significant).

The Takeaway

The 60/40 portfolio investing strategy — where a portfolio consists of 60% stocks and 40% bonds — is a popular one, but it’s not right for everyone. It carries less risk and is less volatile than a portfolio that contains only stocks, making it a traditionally safe choice for retirement accounts. However, experts worry that the current and expected future rate of return isn’t enough to keep up with inflation.

Still, for investors who want a simple “set it and forget it” investment strategy, the 60/40 portfolio can be appealing. Other investors may decide to investigate alternative strategies. Regardless of which direction investors go, the first step in building a portfolio is determining personal goals and then creating a plan based on expected income, time horizon, and other personal factors.

One easy way to get started building a portfolio is by using an online investing platform like SoFi Invest®. The investing platform makes it simple to buy and sell stocks and other assets right from your phone, and you can research and track your favorite stocks and set up personal investing goals.

Plus, SoFi offers both automated and active investing, so you can either select each stock you want to buy, or choose from pre-selected groups of stocks and ETFs. If you need help getting started, SoFi has a team of professional advisors available to answer your questions and assist you in creating a personalized financial plan to reach your goals.

Take a step toward reaching your financial goals with SoFi Invest.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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401(k) Hardship Withdrawals: What Are They and When Should You Use them?

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on 401(k) Hardship Withdrawals: What Are They and When Should You Use them?

A hardship withdrawal is the removal of funds from your 401(k) in response to a pressing and significant financial need. For people who find themselves in a financial bind where they need a large sum of money but don’t expect to be able to pay it back, a 401(k) hardship withdrawal may be an appropriate option.

But before making a withdrawal from a 401(k) retirement account, it’s important to understand the rules and potential drawbacks of this financial decision.

Who Is Eligible for a Hardship Withdrawal?

According to the IRS, an individual can make a hardship withdrawal if they have an “immediate and heavy financial need.”

However, not all 401(k) plans offer hardship withdrawals, so if you’re considering this option talk to your plan administrator — usually someone in an employer’s human resources or benefits department. Another way to get clarity on a particular 401(k) account is to call the number on a recent 401(k) statement and ask for help.

If a retirement plan does allow hardship withdrawals, typically you’ll be expected to present your case to your plan administrator, who will decide if it meets the criteria for hardship. If it does, the amount you are able to withdraw will be limited to the amount necessary to cover your immediate financial need.

In general, a hardship withdrawal should be considered a last resort. To qualify, a person must not have any other way to cover their immediate need, such as by getting reimbursement through insurance, liquidating assets, taking out a commercial loan, or stopping contributions to their retirement plan and redirecting that money.

What Qualifies as a Hardship?

You may be qualified for a hardship withdrawal if you need cash to meet one of the following conditions:

•   Medical care expenses for you, your spouse, or your dependents.

•   Costs related to the purchase of a primary residence, excluding mortgage payments. (Buying a second home or an investment property is not a valid reason for withdrawal.)

•   Tuition and other related expenses, including educational fees and room and board for the next 12 months of postsecondary education. This rule applies to the individual, their spouse, and their children and other dependents.

•   Payments needed to prevent eviction from a primary residence, or foreclosure on the mortgage of a primary residence.

•   Certain expenses to repair damage to a principal residence.

•   Funeral and burial expenses.

•   In certain cases, damage to property or loss of income due to natural disasters.

How Do You Prove Hardship?

A 401(k) provider may need to see proof of hardship before they can determine eligibility for a hardship withdrawal.

Typically, they do not need to take a look at financial status and will accept a written statement representing your financial need. That said, an employer cannot rely on an employee’s representation of their need if the employer knows for a fact that the employee has other resources at their disposal that can cover the need. In this case, the employer may deny the hardship withdrawal.

It’s important to note that employees do not have to use alternative sources if doing so would increase the amount of their financial need. For example, say an employee is buying a primary residence. They do not need to take on loans if doing so would hinder their ability to acquire other financing necessary to purchase the house.

How Much Can You Withdraw?

The amount a person can withdraw from their 401(k) due to financial hardship is limited to the amount that is necessary to cover the immediate financial need. The total can include money to cover the taxes and any penalties on the withdrawal.

In the past, hardship distributions were limited by the amount of elective deferrals that employees had contributed to their 401(k). In other words, employees couldn’t withdraw money that had come from their employer, and they couldn’t withdraw earnings.

However, under recent reforms, employers may allow employees to withdraw elective deferrals, employer contributions, and earnings. Employers are not required to follow these rules though, so it’s important to ask your provider which money in your 401(k) you can draw on.

What Are the Penalties of 401(k) Hardship Withdrawals?

Taking a hardship withdrawal can be a costly endeavor. You will owe income tax on the amount you withdraw, unless you are withdrawing Roth contributions.

Since you’re in your working years, your income tax bill may be considerably more than if you were to withdraw the same money after you retire. In addition, anyone under the age of 59 ½ will also likely pay a 10% early withdrawal penalty.

The IRS provides a list of criteria that can exempt you from the 10% penalty, including if you are disabled or if you’re younger than 65 and the amount of your unreimbursed medical debt exceeds 10 % of your adjusted gross income.

It’s important to know that a hardship withdrawal cannot be repaid to the plan. That means that whatever money you remove from your retirement account online is gone forever — no longer earning returns or subject to the benefits of tax-advantaged growth. The withdrawn amount will not be available to you in your retirement years.

Should You Consider a 401(k) Loan Instead?

Borrowing from your 401(k) may be an alternative to a hardship withdrawal. The IRS limits the amount that an individual can borrow to 50% of their vested account balance or $50,000, whichever is less.

However, if your vested account balance is less than $10,000, you may borrow up to that amount. There’s a reason for this: Your vested balance is the amount of money that already belongs to you. Some employers require you to stay with them for a set period of time before making their contributions available to you.

A person typically has five years to repay a 401(k) loan and usually must make payments each quarter through a payroll deduction. If repayments are not made quarterly, the remaining balance may be treated as a distribution, subject to income tax and a 10% early-withdrawal penalty.

While you do have to pay interest on a 401(k) loan, the good news is you pay it to yourself.

There are some drawbacks to taking out a 401(k) loan. The money you take out of your account is no longer earning returns, and even though it will get repaid over time, it can set back your retirement savings. Loans that aren’t paid back on time are considered distributions and are subject to taxes and early withdrawal penalties for people younger than 59 ½.

The Takeaway

A 401(k) hardship withdrawal can be an important tool for individuals who have exhausted all other options to solve their financial problem. Before deciding to make a hardship withdrawal, it’s a good idea to carefully consider the potential drawbacks, including taxes, penalties, and the permanent hit to a retirement savings account.

It’s also important to know that money in a 401(k) account is protected from creditors and bankruptcy. For anyone considering bankruptcy, taking money out of a 401(k) plan might leave it vulnerable to creditors.

Other options may make more sense, such as working with creditors to come up with an affordable payment plan, or taking out a 401(k) loan, which allows an individual to replace the borrowed income so that their retirement savings can continue to grow when the loan is repaid.

Visit SoFi Invest® to learn more about setting and meeting your financial goals for retirement.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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